China Macro: PMIs jump as China Inc. gets back to business – Yesterday, China’s official PMIs for March provided by the National Bureau of Statistics were published, with both the manufacturing and the non-manufacturing PMIs improving sharply compared to February. The manufacturing PMI rose from the all-time low reached last month (35.7) to 52.0 (January: 50.0). The non-manufacturing PMI, which fell even more extremely last month – as China’s services sector formed the epicentre of the Covid-19 shock – jumped back to 52.3 (compared to 29.6 in February and 54.1 in January). As a result, the composite output PMI rose back from 28.9 in February to 53.0, and is now back at January’s level.
While the PMIs improved more than ‘consensus’ had anticipated, the sharp jump was in line with our expectations, as we highlighted earlier this month. The historic drop in these indicators for February reflected the sudden stop in economic activity caused by the extreme safety measures taken to stem the spread of Covid-19, and the subsequent hit to demand. As these measures have proven effective so far, certainly in an international context, the Chinese government has shifted its priority to starting up the economy again since late February. Even the province of Hubei and its capital Wuhan (where the virus originated, the number of infections and the death toll are the highest and the safety measures the most severe) have moved gradually out of lockdown, although certain restrictions are still in place.
While the PMI improvements were pretty ‘broad-based’, some subindices indicate that the Chinese economy is not out of the woods yet. Particularly many smaller, private firms are still facing difficult funding and other business conditions. The non-manufacturing PMIs show that certain services sectors (like hotels, catering, tourism and entertainment) are still in dire straits, partly reflecting the ongoing strict regulation for cross-border travelling. What is more, the export subindices remain in contraction territory, illustrating the shock that the spread of Covid-19 is currently inflicting on the global economy, and therefore on China’s export prospects. We still expect Chinese real GDP growth to rebound sharply in Q2 and Q3 after a very weak Q1 (with a rare negative annual growth rate). This expectation partly builds on our assumption that Beijing will step up monetary and fiscal easing further (recent official statements and ongoing cuts of several policy interest rates lend support to this view). However, we would like to add that there is still an unusually large amount of uncertainty to our growth forecasts for China and all other countries, given the specifics of this crisis and the extreme measures taken to stem the spread of Covid-19 as well as the extraordinary monetary and fiscal stimulus plans that are being developed across the globe. (Arjen van Dijkhuizen)